Here's Why Ping Identity Holding (NYSE:PING) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Ping Identity Holding Corp. (NYSE:PING) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ping Identity Holding

What Is Ping Identity Holding's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Ping Identity Holding had debt of US$292.3m, up from US$149.0m in one year. However, it does have US$220.6m in cash offsetting this, leading to net debt of about US$71.7m.

A Look At Ping Identity Holding's Liabilities

The latest balance sheet data shows that Ping Identity Holding had liabilities of US$121.5m due within a year, and liabilities of US$315.1m falling due after that. Offsetting this, it had US$220.6m in cash and US$150.5m in receivables that were due within 12 months. So it has liabilities totalling US$65.5m more than its cash and near-term receivables, combined.

Given Ping Identity Holding has a market capitalization of US$2.02b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ping Identity Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Ping Identity Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$299m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Ping Identity Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$78m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$64m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Ping Identity Holding you should be aware of, and 1 of them is concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.